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Strategic and Financial Decision-making - Essay Example

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It measures the volatility of a security. Stocks exhibiting large changes in price as compared to an index like FTSE 100, on up as well as down side are considered to be more volatile and are assigned…
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Strategic and Financial Decision-making
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Strategic and Financial Decision-making

Download file to see previous pages... Both the companies are listed under FTSE 100.
Under CAPM the calculation of cost of capital depends on the principle that the rate of return required on a security is equal to the risk-free rate of interest plus a risk premium, based on the following formula-
Therefore the beta of Sage Group as per calculations is less than the beta that has been published in Bloomberg site and the beta of Diageo Plc as per calculations is also less than that has been published in this site. There can be many reasons for this difference. Like in the case of data like beta that is reported by a site the calculations are more extensive. For the purpose of the calculations, the monthly returns relating to the last twenty four months only has been taken. But the beta estimation in Bloomberg is based on either daily returns or quarterly returns over a long span of time. Some sites base their calculations on the data since the stock inception. As the beta calculated by these sites is based on a longer span of time therefore they are more reliable as it covers a larger number of data points. So the difference in ‘time frame’ can result in different beta estimates. Some of the financial services use weekly observations while others use monthly observations whereas others base their calculations on the last day of trading.
Another reason for the varying beta is that they are calculated using different indices in the market. Some sources use Standard & Poor 500 as the benchmark index, some use Russell 1000, 2000 and others use Value Line Index. In such situations the best way is to choose which provides the beta for most of the companies in the guideline (Pratt & Niculita, 2007, pp.211)
It may be possible that the fundamentals of the company have changed over time in that case the beta that is calculated based on a recent period is more reliable (Pratt & Grabowski, 2008, pp.141). Based on this it can be said that the beta based on the recent period is more reliable as ...Download file to see next pagesRead More
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